“Governments Must Not Bail Out Bondholders”


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Lucian Bebchuk says there's no need for the government to protect bondholders
in a financial crisis:


Governments must not bail out bondholders, by Lucian Bebchuk, Commentary,
Project Syndicate
: A year after the United States government allowed …
Lehman Brothers to fail but then bailed out AIG,… a key question remains: when
and how should authorities rescue financial institutions?

It is now widely expected that, when a financial institution is deemed “too big
to fail”, governments will intervene if it gets into trouble. But how far should
such interventions go? In contrast to the recent rash of bailouts,… the
government’s safety net should never be extended to include the bondholders of
such institutions.

In the past, government bailouts have typically protected all contributors of
capital of a rescued bank other than shareholders. Shareholders were often
required to suffer losses or were even wiped out, but bondholders were generally
saved by the government’s infusion of cash. … Bondholders were saved because
governments generally chose to infuse cash in exchange for common or preferred
shares – which are subordinate to bondholders’ claims – or to improve balance
sheets by buying or guaranteeing the value of assets.

A government may wish to bail out a financial institution and provide protection
to its creditors for two reasons. First,… a protective government umbrella
might be necessary to prevent inefficient “runs” on the institution’s assets
that could trigger similar runs at other institutions.

Second, most small creditors are … unable to monitor and study the financial
institution’s situation when agreeing to do business with it. To enable small
creditors to use the financial system, it might be efficient for the government
to guarantee (explicitly or implicitly) their claims.

But, while these considerations provide a basis for providing full protection to
depositors and other depositor-like creditors…, they do not justify extending
such protection to bondholders.

Unlike depositors, bondholders generally are not free to withdraw their capital
on short notice. They are paid at a contractually specified time, which may be
years away. Thus, if a financial firm appears to have difficulties, its
bondholders cannot stage a run on its assets and how these bondholders fare
cannot be expected to trigger runs by bondholders in other companies.

Moreover, when providing their capital to a financial firm, bondholders can
generally be expected to obtain contractual terms that reflect the risks they
face. Indeed, the need to compensate bondholders for risks could provide market
discipline: when financial firms operate in ways that can be expected to produce
increased risks down the road, they should expect to “pay” with, say, higher
interest rates or tighter conditions.

But this source of market discipline would cease to work if the government’s
protective umbrella were perceived to extend to bondholders… Thus, when a
large financial firm runs into problems that require a government bailout, the
government should be prepared to provide a safety net to depositors and
depositor-like creditors, but … the government should not provide funds
(directly or indirectly) to increase the cushion available to bondholders.

Rather, bonds should be at least partly converted into equity capital, and any
infusion of new capital by the government should be in exchange for securities
that are senior to those of existing bondholders.

Governments should … make their commitment to this approach clear in advance. … This would not only eliminate some of the unnecessary costs of government
bailouts, but would also reduce their incidence.

Anything that imposes the costs of the bailout on the people
participating in the markets rather than on taxpayers without
compromising the ability to protect the financial system (or, as claimed above, even enhancing the protective shield) is ok with me.

Do you tweet after sex?


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Where do you tweet? When? More important, what’s normal? Are you some kind of freak?

A recent Gadgetology study by Retrovo.com, a consumer electronics shopping site, seeks to ascertain where the line in the sand is in regards to social media use (and overuse). If you’re 35 or younger, regular use of sites such as Twitter and Facebook is common (big shock, right?). It looks to Retrovo like a new addiction may be taking root.

Continue reading Do you tweet after sex?

Do you tweet after sex? originally appeared on BloggingStocks on Sun, 25 Oct 2009 16:40:00 EST. Please see our terms for use of feeds.

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User-generated Wi-Fi hotspots


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Finding that elusive open Wi-Fi connection just got easier this week with the launch of a new application that is building a world Wi-Fi map from its users connections.
Devicescape, a Silicon Valley startup, had previously offered a simple program called Easy Wifi that enabled automatic logons to Wi-Fi networks – walk into a Starbucks and […]

On an earnings roll, Netflix eyes streaming video market as new frontier


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You got to hand it to Netflix Inc. (NASDAQ: NFLX). At a time when movie rental houses — chief among them, rival Blockbuster Inc. (NYSE: BBI) — are struggling to keep their doors open, Netflix is prospering, rolling out new initiatives and finding new ways for video-hungry consumers to watch movies.

On Thursday, co-founder and CEO Reed Hastings told investors on a conference call that the company will soon partner with another consumer-electronics maker to make streaming video available on more devices. That’s on top of deals Netflix has already struck with Microsoft Corp. (NASDAQ: MSFT) and its Xbox, which expires next month, and Best Buy Inc. (NYSE: BBY), with its line of Insignia brand Blu-Ray disc players.

Continue reading On an earnings roll, Netflix eyes streaming video market as new frontier

On an earnings roll, Netflix eyes streaming video market as new frontier originally appeared on BloggingStocks on Sun, 25 Oct 2009 15:40:00 EST. Please see our terms for use of feeds.

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What Caused the $1.2 Federal Trillion Deficit ?


This post is by from The Big Picture


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Bruce Bartlett — yes THAT Bruce Bartlett — takes the usual suspects to school. He immolates the phony deficit hawks on the actual causes of the Federal shortfall (hint: Do unfunded tax cuts ring any bells?):

According to the Congressional Budget Office’s January 2009 estimate for fiscal year 2009, outlays were projected to be $3,543 billion and revenues were projected to be $2,357 billion, leaving a deficit of $1,186 billion. Keep in mind that these estimates were made before Obama took office, based on existing law and policy, and did not take into account any actions that Obama might implement.

Therefore, unless one thinks that McCain would have somehow or other raised taxes and cut spending (with a Democratic Congress), rather than enacting a stimulus of his own, then a deficit of $1.2 trillion was baked in the cake the day Obama took office. Any suggestion that McCain would have brought in a lower deficit is simply fanciful.

Now let’s fast forward to the end of fiscal year 2009, which ended on September 30. According to CBO, it ended with spending at $3,515 billion and revenues of $2,106 billion for a deficit of $1,409 billion.

To recap, the deficit came in $223 billion higher than projected, but spending was $28 billion and revenues were $251 billion less than expected. Thus we can conclude that more than 100 percent of the increase in the deficit since January is accounted for by lower revenues. Not one penny is due to higher spending.

Wow, when this guy burns bridges, he sure doesn’t fuck around!

>

Hat tip Scotta!

>

Source:
Why the Economy Needs Spending, Not Tax Cuts
Bruce Bartlett
Oct 24, 2009
http://capitalgainsandgames.com/blog/bruce-bartlett/1200/why-economy-needs-spending-not-tax-cuts


Sunday links: your own time horizon


This post is by from Abnormal Returns


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Jason Zweig, “As an investor, you are free to choose your own time horizon. If other people want to try earning a few fractions of a penny a few thousand times a day, you should wish them well — and refuse to join them.”  (WSJ)

“The wild ride of the last decade or so does not mean that stocks will underperform bonds in the months or years ahead. If only it were that simple.”  (NYTimes)

What role have individual investors had in the run-up in commodity prices?  (The Reformed Broker, Journal of Investing via Infectious Greed)

As money flows into bonds, some of it is finding its way into individual bonds.  (WSJ)

Rydex market timers are “all in” and other  investor sentiment measures at week-end.  (The Technical Take, Trader’s Narrative)

Why should we assume there is a stable relationship between the price of crude oil and the S&P 500?  We shouldn’t.  (Abnormal Returns)

On the use of your equity curve to guide trading decisions.  (CSS Analytics)

The ability to sit through a trade is greatly underappreciated.”  (TraderFeed)

Add Richard Bernstein to the bull camp. (Credit Writedowns)

What are the odds that Bruce Berkowitz can outperform as a bond manager?  (Marketwatch)

Now is a good time for a stock replacement strategy.  (Barron’s)

Who won (collectively) over the past ten years:  Vanguard investors or Fidelity investors?  (Morningstar)

TheStreet.com (TSCM) is a mess.  (Zero Hedge)

Why is Citigroup (C) pulling out all the revenue stops?  (Mish)

Joe Nocera, “Goldman makes its money primarily by taking trading risks, and so long as that is the case, American taxpayers are going to question why they should have to be on the hook if Goldman suddenly runs into serious trouble.”  (NYTimes also Big Picture)

John C. Ogg, “The fate of Fannie and Freddie as far as the common and preferred shares go depends almost entirely upon the political situation in Washington …”  (24/7 Wall St.)

Is the stimulus working?  (Time also Atlantic Business)

Taking a look at the long term effects of substantial federal budget deficits.  (SSRN)

Donald J. Boudreaux, “Insider trading is impossible to police and helpful to markets and investors. Parsing the difference between legal and illegal insider trading is futile—and a disservice to all investors.”  (WSJ)

Do we have the health care plan all backwards?  (NYTimes also EconLog)

Does economics violate the laws of physics?  (Scientific American via Economist’s View)

Howard Lindzon, “There is one bubble that I do not fear…the social web/social leverage bubble.”  (Howard Lindzon)

John Gruber, “Operating systems aren’t mere components like RAM or CPUs; they’re the single most important part of the computing experience.”  (Daring Fireball)

Is blog reading now mainstream?  (A VC)

U-pick-it orchards are a big scam.  (Slate)

Abnormal Returns is a proud member of the StockTwits Network.

Rethinking World Income Distribution: Not So Bad?


This post is by from Paul Kedrosky's Infectious Greed


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Some controversial and potentially important findings in a new paper on a global income distribution changes over the last 40 years:

Parametric Estimations of the World Distribution of Income
Maxim Pinkovskiy, Xavier Sala-i-Martin

We use a parametric method to estimate the income distribution for 191 countries between 1970 and 2006. We estimate the World Distribution of Income and estimate poverty rates, poverty counts and various measures of income inequality and welfare. Using the official $1/day line, we estimate that world poverty rates have fallen by 80% from 0.268 in 1970 to 0.054 in 2006. The corresponding total number of poor has fallen from 403 million in 1970 to 152 million in 2006. Our estimates of the global poverty count in 2006 are much smaller than found by other researchers. We also find similar reductions in poverty if we use other poverty lines. We find that various measures of global inequality have declined substantially and measures of global welfare increased by somewhere between 128% and 145%. We analyze poverty in various regions. Finally, we show that our results are robust to a battery of sensitivity tests involving functional forms, data sources for the largest countries, methods of interpolating and extrapolating missing data, and dealing with survey misreporting. [Emphasis mine]


Will Blackstone make magic with Merlin?


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What has Blackstone (NYSE: BX) been doing with all those theme parks it’s been buying? Well, the answer is becoming a bit clearer now. The private equity firm is getting ready to take theme park operator Merlin Entertainments public early next year.

Several investment banks have already been called to advise on the transaction, including Citigroup (NYSE: C), Goldman Sachs (NYSE: GS), Deutsche Bank (NYSE: DB), UBS (NYSE: UBS), and Nomura (NYSE: NMR). If all goes as planned, the deal could be good for $3.33 billion.

Continue reading Will Blackstone make magic with Merlin?

Will Blackstone make magic with Merlin? originally appeared on BloggingStocks on Sun, 25 Oct 2009 14:40:00 EST. Please see our terms for use of feeds.

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Weekend Reading: iPhone, Oil, Rails, WaMu, etc.


This post is by from Paul Kedrosky's Infectious Greed


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A few links from my weekly Weekend Reading column:


UK Stocks Rise; H&T, Churchill Mining Up


This post is by from 123Jump.com: Market News


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UK stocks tracked the gains in commodities and energy prices. The legal outsourcing services provider CPA Global is likely to be acquired by a private equity firm for £400 million. The pawnbroker H&T Group surged on higher revenues estimate. Churchill Mining estimated one billion tons of coal.

Obama says banks should lend more to small businesses: Please God, no


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Terrifying talking points out of the White House this week: President Obama called on bailed-out banks to lend more money to small businesses.

Speaking on his weekly radio address, Obama said that “These are the very taxpayers who stood by America’s banks in a crisis, and now it’s time for our banks to stand by creditworthy small businesses and make the loans they need to open their doors, grow their operations and create new jobs.”

Continue reading Obama says banks should lend more to small businesses: Please God, no

Obama says banks should lend more to small businesses: Please God, no originally appeared on BloggingStocks on Sun, 25 Oct 2009 13:40:00 EST. Please see our terms for use of feeds.

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Reason #10: Take a good look around


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Reason #10 why the economy won't recover in 2010Do you see a rebound?

The Mall of America would be a great practice field for the Minnesota Vikings, fall and winter clothes are already 40% off at Macy’s, and the Palms in Vegas is mailing me coupons.

Recently, I went out to eat with some friends: One owns a construction business that has come to a standstill; two are media types out of work; and one is the owner of a small manufacturing company, who is laying people off as fast as she can and is now worried about her own survival. And I’m sure you’ve heard similar tales of woes from your family, friends and neighbors.

Continue reading Reason #10: Take a good look around

Reason #10: Take a good look around originally appeared on BloggingStocks on Sun, 25 Oct 2009 13:00:00 EST. Please see our terms for use of feeds.

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The week in preview: Trick or treat earnings?


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So this earnings season hasn’t turned out as bad as some had feared. In fact, we’ve seen some pretty stellar results from the likes of Amazon.com (NASDAQ: AMZN), Apple (NASDAQ: AAPL), and Yahoo! (NASDAQ: YHOO).

Then there was the Fed’s Beige Book report, which suggested that the U.S. economy had stabilized — and even improved a bit in some sectors.

Well, the earnings crunch rolls on this coming week leading up to Halloween. Do analysts surveyed by Thomson Reuters expect more treats or tricks from coming quarterly reports?

Continue reading The week in preview: Trick or treat earnings?

The week in preview: Trick or treat earnings? originally appeared on BloggingStocks on Sun, 25 Oct 2009 12:30:00 EST. Please see our terms for use of feeds.

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Reason #9: The Fed can’t do it either


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Reason #9 the economy won't recover in 2010Historically, the Fed has lowered interest rates to spur spending and investment.

Well, the Fed has already cut interest rates to banks down to essentially zero. The media are screaming about potential inflation due to the trillion dollars the Fed put into the system, but that trillion has simply replaced the trillion written down by the banks, which have another trillion and a half in write-downs to go.

Continue reading Reason #9: The Fed can’t do it either

Reason #9: The Fed can’t do it either originally appeared on BloggingStocks on Sun, 25 Oct 2009 12:00:00 EST. Please see our terms for use of feeds.

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Did Google try to buy Twitter?


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Sergey Brin claims that Google (NASDAQ: GOOG) didn’t try to buy Twitter. The co-founder of the search engine giant made a surprise appearance at Web 2.0 Thursday, where organizer John Battelle asked point blank if he’d made a move for the popular microblogging website.

Of course, Brin revealed his fluency in corporate speak, continuing, “But if companies approach us we definitely consider any opportunities to buy,” according to Reuters. A denial doesn’t always mean a denial, especially if there were agreements to keep negotiations confidential.

Continue reading Did Google try to buy Twitter?

Did Google try to buy Twitter? originally appeared on BloggingStocks on Sun, 25 Oct 2009 11:20:00 EST. Please see our terms for use of feeds.

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New Housing Starts


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I guess if you look at starts in a certain way — and ignore the obvious seasonality — they may appear to be up, but . . .

>

200909-housing-starts

Hat tip Rob


Reason #8: Uncle Sam can’t bail us out


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Reason #8 the economy won't recover in 2010In the past, the government has increased spending and cut taxes to spur spending during times of economic crisis.

However, Uncle Sam is now in so much debt that this is no longer a serious option. And it looks like we are going to spend another $900 billion-plus on health care reform over 10 years (a lot of money, sure, but about a third less than what Wall Street will spend on bonuses).

Continue reading Reason #8: Uncle Sam can’t bail us out

Reason #8: Uncle Sam can’t bail us out originally appeared on BloggingStocks on Sun, 25 Oct 2009 11:00:00 EST. Please see our terms for use of feeds.

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RBI Lowers India Growth; Maruti Suzuki Net Up


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Mumbai stocks closed lower ahead of the Reserve Bank of India rate decision tomorrow. The RBI lowered its economic growth target to 6% from 6.5%. Maruti Suzuki quarterly sales surged 47%. Pantaloon Retail quarterly net increased 21%. Dena Bank, Canara Bank and ING Vysya earnings surge.

VZ Sales Up 10%; National Oilwell Net Drops


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Verizon Communications Inc third quarter revenues rose 10% to $27.3 billion and net income fell 9.4% to $2.9 billion or 41 cents a share. National Oilwell Varco, Inc third quarter revenues fell 14.4% to $3.09 billion and net income fell 29.7% to $385 million or 92 cents a share.